Tim Jones of the Lamb Building Civil Team discusses the recent decision of the Court of Appeal in Faiz and Others v Burnley Borough Council  EWCA Civ 55 and its impact on landlords.
A common defence to claims for forfeiture of a lease is that the landlord has waived his/her right to forfeit by acting in a way that implies that the lease continues.
The law on waiver of forfeiture can be summarised as follows:
- Following the discovery of a tenant’s breach of covenant – for example, a failure to pay the rent – a landlord has a choice. He/she can decide either to forfeit (terminate) the lease or treat the lease as continuing notwithstanding the breach, in which case he waives his right to forfeit. This is known as “the doctrine of election.”
- The purpose of this doctrine is that it enables the parties to a lease to know where they stand following a breach. It would be unjust if a tenant, though having committed a breach, understood that the lease was nonetheless continuing and continued to comply with his/her obligations (including, for example, payment of rent beyond the date on which the breach occurred) only to be made subject to forfeiture proceedings in respect of that breach later. The landlord cannot have it all ways.
- Waiving the right to forfeit is not tantamount to waiving a breach of covenant full stop. Rather, it simply means that forfeiture is removed from the list of available remedies. The landlord may still issue a money claim or injunction application.
- A landlord may imply that he/she has elected not to forfeit the lease by expecting continued compliance with it terms – for example, by continuing to demand and/or accept rent. After all, if the lease has been terminated, then there is no reason why the tenant should still be expected to pay rent. This may happen by accident – for example, if the landlord is a company rather than an individual and one employee or department is not aware of a breach that the company is deemed to know about, thus leading them to demand rent by mistake.
- The burden of proving waiver falls on the tenant.
So we see that there is a window in which the landlord may decide whether to forfeit the lease, and that there is scope for the landlord to prejudice his/her position by getting this wrong. But when does that window open, and when does it close? That was the question the Court of Appeal considered in Faiz and Others v Burnley Borough Council.
The salient facts of the case were as follows:
- Burnley Borough Council (“Burnley”) granted a lease of a café to Mr. Faiz and his daughter.
- The lease was due to expire on 25 March 2020.
- Under the lease, Burnley covenanted to insure the premises.
- The following payments were due to Burnley under the covenants of the lease:- Rent, which was payable quarterly on 1 January, 1 April, 1 July and 1 October each year; and- Insurance rent, which was calculated by reference to the cost to Burnley of insuring the premises, and which was due within seven days of demand.
- Additionally, the lease contained covenants absolutely prohibiting the tenants from subletting the premises and providing for forfeiture in the event of breach of covenant.
- On 26 September 2019, Burnley made a demand for insurance rent, payment of which would fall due on 2 October 2019 (for conciseness, all further date references are to dates in 2019 unless otherwise stated).
- At some point prior to 18 October (on the facts, it was not clear precisely when), the tenants granted a sub-lease of the café to a company. The grant of the sub-lease amounted to a breach of the absolute prohibition on subletting contained in the head lease. Burnley were unaware of the grant of the sub-lease at the time it was granted.
- Burnley first became aware of the existence of the sub-lease on or around 18 October when the tenants’ solicitors wrote to them enclosing a copy of the sub-lease. Thus, this was the point at which they became aware of the breach.
- On 30 October, Burnley began the process for forfeiture of the lease by serving the tenants with a notice under Section 146 of the Law of Property Act 1925.
- However, on 4 November, Burnley sent a further demand for insurance rent to the tenants. The demand covered the period ending on 18 October, which included some of the period encompassed by the previous demand of 26 September; was described as “recharge of buildings insurance” rather than as a demand for insurance rent; and stipulated that payment was due on 4 November, rather than giving the usual seven days for payment. The reason for this approach was that Burnley were trying to recover this money without falling into the trap of accidentally implying that they had waived their right to forfeit.
- Payment of the invoice of 4 November was made on 11 November.
- On 22 November, Burnley purported to forfeit the lease by peaceable re-entry (i.e. changing the locks).
The court’s decision
The first issue for the Court of Appeal to decide was the effect of a landlord accepting rent that fell due after a breach occurred but before he/she had knowledge of that breach. The court cited dicta of Rix LJ in Osibanjo v Seahive Investments Ltd  EWCA Civ 1282 with approval and found that such acceptance would amount to waiver of the breach. The breach of covenant entitles the landlord to forfeit the lease, even if he/she is unaware of that entitlement; therefore, once he/she has knowledge of the breach, the landlord will waive his/her right to forfeiture by accepting rent due at any point after the breach, even if it fell due before he/she was aware, because it implies that he/she is still the landlord. Per Lewison LJ (emphasis added):
“28. In principle, therefore, it seems to me that the view expressed by Rix LJ is the right one. It does not matter whether the rent accrued due before or after the date of the landlord’s knowledge; but whether it accrued due before or after the date of the breach of which the landlord (now) has knowledge. The point can be tested this way. The tenant commits a once-and-for-all breach of covenant in, say, January. The rent is payable on the usual quarter days, but remains unpaid. The landlord discovers the breach in, say, July when the rent is still unpaid. Is it consistent for the landlord to say: on the one hand I am entitled to forfeit the lease because you committed a breach of covenant in January; but, on the other hand, I am entitled to demand and be paid the rent that fell due on 25 March and 24 June? The tenant’s liability to pay rent arises only because he is the tenant. By demanding and accepting rent from the tenant the landlord is surely accepting that the lease continues at least until the dates on which those instalments of rent accrued due. In this example both rent days post-date the breach. It would, in my judgment, be inconsistent for the landlord to maintain the position that he could both rely on a breach committed in January and yet (with knowledge that a breach had taken place in January) accept rent due in March and June.”
The Court of Appeal found that the landlord was not aware of the breach on 2 October, at the time the first invoice of 26 September became payable, and it was not clear whether the breach had even occurred before the insurance rent fell due. The invoice of 26 September did not, therefore, constitute waiver of forfeiture. In the alternative, the tenants argued that the demand of 4 November constituted a waiver, because Burnley were aware of the breach at this point, having been notified on 18 October. However, the Court of Appeal rejected this argument. Per Lewison LJ (emphasis added):
“41. In my judgment the 4 November invoice did not amount to a fresh demand for insurance rent due under the lease. First, it demanded payment for only part of the period already covered by the September invoice. Second, it asserted that payment was due on the very day on which the invoice was sent, which is inconsistent with the contractual machinery for a fresh demand. Although, as Mr Byrne submitted, insurance rent due under the lease becomes due 7 days after the demand, this invoice said in terms that the amount demanded was due on 4 November. Third, the tenants cannot have thought that the Council was requiring payment under both invoices; so the second invoice must, by necessary implication, have superseded the first one.
42. Because the November invoice asserted that it was payable on the date of the invoice itself, it cannot have been a demand for an amount due under the lease. It could only have been an indication by the Council that it was willing to accept a lower sum than that which had been previously demanded under the September 4 invoice. Accordingly, in agreement with the judge, I would hold that the November invoice did not amount to a waiver of the forfeiture.
43. In this case the landlord was paid (and accepted the payment) on 11 November 2019. The Council’s state of knowledge on 11 November was that a breach had taken place. But it did not know when that breach had taken place (except that that it must have been on or before 18 October). If, as I consider, the November invoice was an indication by the Council that it would accept only part of the sum that had accrued due on 2 October, then it follows that the Council did not know that it was accepting rent that accrued due before the date of the breach. The acceptance of the payment did not, therefore, amount to a waiver of the forfeiture.”
The Court of Appeal’s decision provides much-needed clarity, particularly for landlords, on acceptance of rent falling due after a breach occurs. However, it also reinforces the need for a landlord to decide on a course of action quickly after becoming aware of a breach so as to minimise losses of income.
Written by Tim Jones. All views are my own.